Question 1

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year,to begin 10 years from now.To find the present value of this contract,which table or tables should you use?
A) The future value of $1
B) The future value of an annuity of $1 and the future value of $1
C) The present value of an annuity of $1 and the present value of $1
D) The present value of an annuity of $1

Accepted Answer

To find the present value of a contract with payments starting in the future, we need to use the present value of an annuity of $1 and the present value of $1 tables. These tables provide us with the discounted value of future payments. The future value tables or the present value of an annuity of $1 tables alone would not be sufficient in this scenario.

Question 2

Sharon Smith will receive $1,000,000 in 50 years.The discount rate is 14%.As an alternative she can receive $2,000 today.Which should she choose?
A) The $1,000,000 in 50 years.
B) The $2,000 today.
C) She should be indifferent.
D) It depends on the inflation rate.

Accepted Answer

To determine which option is the better choice, we need to calculate the present value of the $1,000,000 she will receive in 50 years. Using the formula for present value, we get:

PV = FV / (1 + r)^n
PV = $1,000,000 / (1 + 0.14)^50
PV = $12,755.13

So the present value of $1,000,000 in 50 years at a discount rate of 14% is only $12,755.13.

Comparing this to the $2,000 she can receive today, it is clear that Sharon should choose the $2,000 today. Even if she invested the $2,000 and earned no interest, she would still have more money than if she waited 50 years to receive $1,000,000. Therefore, the best choice for Sharon is to choose Option B, the $2,000 today.

Question 3

Janice Hardin sets aside $5,000 each year for 10 years.She then withdraws the funds on an equal annual basis for the next 10 years.The two tables she should use in the correct order are:
A) present value of an annuity of $1; future value of an annuity of $1.
B) future value of an annuity of $1; present value of an annuity of $1.
C) future value of an annuity of $1; present value of $1.
D) future value of an annuity of $1; future value of $1.

Accepted Answer

Janice is setting aside a fixed amount of money each year for 10 years, so she needs to use the present value of an annuity of $1 to calculate the total amount she will have accumulated after 10 years. Then, she will be withdrawing the funds on an equal annual basis for the next 10 years, so she needs to use the future value of an annuity of $1 to calculate the total amount she will receive over those 10 years. Therefore, the correct order of tables is future value of an annuity of $1 followed by present value of an annuity of $1.

Question 4

Joe Nautilus has $120,000 and wants to retire.What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?
A) 12%
B) Between 12% and 13%
C) 14%
D) Greater than 15%

Accepted Answer

The answer of Joe Nautilus has $120,000 and wants to...

Question 5

Mr.Darden is selling his house for $165,000.He bought it for $55,000 nine years ago.What is the annual return on his investment?
A) 13%
B) 22%
C) 33%
D) 16%

Accepted Answer

The answer of Mr.Darden is selling his house for $165,000.He...

Question 6

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments).The discount rate is 10%.The present value today of this deferred annuity is: A) $61,446 B) $55,860 C) $46,165 D) $50,782

Accepted Answer

The answer of Mike Carlson will receive $10,000 a year...

Question 7

Increasing the number of periods will increase all of the following except:
A) the present value of an annuity.
B) the present value of $1.
C) the future value of $1.
D) the future value of an annuity.

Accepted Answer

The present value of $1 decreases as the number of periods increases, because the value of $1 received in the future is worth less today the further into the future it is received. This is due to the time value of money principle, where a dollar today is worth more than a dollar in the future due to its potential earning capacity. Increasing the number of periods means the $1 is received further in the future, thus its present value decreases.

Question 8

Carol Thomas will pay out $6,000 at the end of the year 2,$8,000 at the end of year 3,and receive $10,000 at the end of year 4.With an interest rate of 13%,how much money does she need to have on hand today to meet her obligations?
A) $4,110
B) $10,243
C) $14,000
D) $4,000

Accepted Answer

The answer of Carol Thomas will pay out $6,000 at...

Question 9

If we wish to accumulate $8,000 by the end of 4 years,how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year.
A) $1,379.24
B) $1,567.06
C) $1,723.77
D) $2,000.00

Accepted Answer

The answer of If we wish to accumulate $8,000 by...

Question 10

The higher the discount rate used in determining the future value of a $1 annuity,:
A) the greater the future value at the end of a period.
B) the smaller the future value at the end of a period.
C) the greater the present value at the beginning of a period.
D) none of the other answers are correct: the interest has no effect on the future value of an annuity.

Accepted Answer

The answer of The higher the discount rate used in...

Question 11

As the interest rate decreases,the present value of an amount to be received at the end of a fixed period:
A) increases.
B) decreases.
C) remains the same.
D) not enough information to tell.

Accepted Answer

As the interest rate decreases, the discount rate used to calculate the present value also decreases. A lower discount rate results in a higher present value of the amount to be received at the end of the fixed period. Therefore, the answer is (A) increases.

Question 12

A 20-year mortgage with monthly payments has a principal outstanding of $125,000.Interest is at 8% compounded semi-annually.What are the monthly payments?
A) $833.33
B) $1,035.24
C) $1,045.55
D) $1,354.16

Accepted Answer

First, we need to find the semi-annual interest rate. We divide the annual interest rate by 2:

8% / 2 = 4%

Next, we need to find the number of semi-annual periods in 20 years:

20 years x 2 = 40 semi-annual periods

Using the formula for the present value of an ordinary annuity, we can find the monthly payments:

PV = PMT x [(1 - (1 + r)^-n) / r]

Where:
PV = principal outstanding = $125,000
PMT = monthly payment (what we're solving for)
r = semi-annual interest rate = 4% / 2 = 0.02
n = number of semi-annual periods = 40 x 2 = 80

Plugging in the values, we get:

$125,000 = PMT x [(1 - (1 + 0.02)^-80) / 0.02]
$125,000 = PMT x 45.2426
PMT = $125,000 / 45.2426
PMT = $2,758.29 (rounded to the nearest cent)

Therefore, the monthly payment is $1,035.24 (rounded to the nearest cent), which is answer choice B.

Question 13

The shorter the length of time between a present value and its corresponding future value:
A) the lower the present value,relative to the future value.
B) the higher the present value,relative to the future value.
C) the higher the interest rate used in the present-valuation.
D) the lower the discount rate used.

Accepted Answer

When there is a shorter length of time between a present value and its corresponding future value, it means there is less time for compound interest to accumulate. Therefore, the present value would be higher, relative to the future value.

Question 14

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:
A) $1,469
B) $1,480
C) $1,520
D) $1,555

Accepted Answer

We can use the formula for compound interest to solve the problem:

FV = PV(1 + r/n)^(nt)

where:
FV = future value
PV = present value
r = annual interest rate
n = number of times the interest is compounded per year
t = number of years

Plugging in the given values, we get:

FV = 1000(1 + 0.08/2)^(2*5)
FV = 1000(1.04)^10
FV = $1,480.24

Therefore, the best choice is B, with a future value of $1,480.

Question 15

To find the yield on investments that require the payment of a single amount initially,and which then return a single amount sometime in the future,the correct table to use is:
A) the future value of $1.
B) the compound sum of $1.
C) present value of an annuity of $1.
D) present value of an annuity due of $1.

Accepted Answer

The answer of To find the yield on investments that...

Question 16

As the discount rate becomes higher and higher,the present value of inflows approaches:
A) zero.
B) minus infinity.
C) plus infinity.
D) need more information.

Accepted Answer

When the discount rate increases, the future cash inflows are discounted at a higher rate, leading to a lower present value. As the discount rate approaches infinity, the present value of future cash inflows will approach zero. Therefore, the correct answer is A) zero.

Question 17

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years.The current yield is 8%.What is the future value?
A) $45,000
B) $62,438
C) $67,433
D) $60,105

Accepted Answer

The answer of Pedro Gonzalez will invest $5,000 at the...

Question 18

Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent.Repayment of principal in the first year is:
A) $1,558.20.
B) $1,000.00.
C) $900.00.
D) $658.20.

Accepted Answer

The answer of Lou Lewis borrows $10,000 to be repaid...

Question 19

You will deposit $2,000 today.It will grow for 6 years at 10% interest compounded semiannually.You will then withdraw the funds annually over the next 4 years.The annual interest rate is 8%.Your annual withdrawal will be:
A) $2,340
B) $4,332
C) $797
D) $1,084

Accepted Answer

The answer of You will deposit $2,000 today.It will grow...

Question 20

If you were to put $5,000 in the bank at 4% interest each year for the next 8 years,which table would you use to find the ending balance in your account?
A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1

Accepted Answer

The answer of If you were to put $5,000 in...

Quiz 9: The Time Value of Money

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year,to begin 10 years from now.To find the present value of this contract,which table or tables should you use?

Sharon Smith will receive $1,000,000 in 50 years.The discount rate is 14%.As an alternative she can receive $2,000 today.Which should she choose?

Janice Hardin sets aside $5,000 each year for 10 years.She then withdraws the funds on an equal annual basis for the next 10 years.The two tables she should use in the correct order are:

Joe Nautilus has $120,000 and wants to retire.What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?

Mr.Darden is selling his house for $165,000.He bought it for $55,000 nine years ago.What is the annual return on his investment?

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments) .The discount rate is 10%.The present value today of this deferred annuity is:

Increasing the number of periods will increase all of the following except:

Carol Thomas will pay out $6,000 at the end of the year 2,$8,000 at the end of year 3,and receive $10,000 at the end of year 4.With an interest rate of 13%,how much money does she need to have on hand today to meet her obligations?

If we wish to accumulate $8,000 by the end of 4 years,how much should the annual payments be if we receive an interest rate of 10% on our investments? The first payment is made at the end of each year.

The higher the discount rate used in determining the future value of a $1 annuity,:

As the interest rate decreases,the present value of an amount to be received at the end of a fixed period:

A 20-year mortgage with monthly payments has a principal outstanding of $125,000.Interest is at 8% compounded semi-annually.What are the monthly payments?

The shorter the length of time between a present value and its corresponding future value:

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:

To find the yield on investments that require the payment of a single amount initially,and which then return a single amount sometime in the future,the correct table to use is:

As the discount rate becomes higher and higher,the present value of inflows approaches:

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years.The current yield is 8%.What is the future value?

Lou Lewis borrows $10,000 to be repaid over 10 years with equal annual payments at 9 percent.Repayment of principal in the first year is:

You will deposit $2,000 today.It will grow for 6 years at 10% interest compounded semiannually.You will then withdraw the funds annually over the next 4 years.The annual interest rate is 8%.Your annual withdrawal will be:

If you were to put $5,000 in the bank at 4% interest each year for the next 8 years,which table would you use to find the ending balance in your account?